Recovery is fitful and has setbacks

Outlook

Never mind the GDP numbers from the eurozone on Friday—all you need to know is that George Soros bought into a Spanish construction company (after Bill Gates had already done so). This is not your grandpa’s speculative bottom-fishing, this is Soros. We take it as a sign the peripheral sovereign risk crisis really is over.

The OECD concurs. Its composite leading indicators for the major economies, while hardly a staple of the data set we have to look at, show signs of improvement just about everywhere. The leading indicator for the OECD's 34 members rose to 100.9 from 100.8 in November. Set-backs can still occur, but growth should advance in the US, UK, and Japan with some flickers of light in Europe, and not just Germany. The leading indicator for France rose to 100.5 in December from 100.3 in November, while the leading indicator for Italy rose to 101.3 from 101.2.

In the US, New Fed chief Yellen presents the semi-annual report to the House Financial Services Committee on Tuesday and the Senate Banking Committee on Thursday. The prepared statement is available at 8:30 am on Tuesday but it’s the testimony on TV that’s fun, although it was better when Greenspan was insulting the Congressmen. Bernanke was polite and Yellen will be a lady, too.

In a shocking development, the House put together a panel of four economists (including ex-Fed Kohn and John Taylor, he of the Taylor Rule) to discuss the testimony. The panel’s talks will also be broadcast live. This is a classic American take on a British tradition of having a “shadow” policy body but with screaming fanfare. Can you imagine what Greenspan would have said if they had pulled this stunt on him? Some analysts are already saying Yellen has a weak hand, with some data contradicting the taper and taking some explaining. We say she has exactly the same hand she inherited from Bernanke and is just as qualified to refute arguments against Fed policy parameters and decision. Remember, dancing backwards and in high heels. Besides, data like the payrolls report was taken in stride far better than we expected. When the stock market signals approval of policy in the context of new data, why should Congress go off on a tangent?

We are starting to accept that the recovery is fitful and has setbacks, if not big holes (inflation), and yields will not rise as much as the idea of tapering initially suggested. But the yield curve is steeper and not likely to go inverted, and that’s a big deal.

Wall Street guru Lynne makes an intriguing point—“Come March, the effects of $20B in Fed tapering will finally start to show up in the Federal Reserve’s balance sheet—most likely, with a $6B shrinkage, since there was still $14B of maturities and interest being reinvested simultaneous with the January taper. The first time the Fed releases its balance sheet, and it’s actually smaller than it was at the peak, the reality will hit home on Wall Street. And if by then the economic data is still weak to tepid, another Taper Tantrum could well pull stocks back down, again. Just something to watch for next month, given that this month is a short one, and snow and ice, once again, is likely to play havoc with the stats.”

We haven’t seen this comment elsewhere. Maybe shrinking the Fed balance sheet will be seen as a Good Thing and silence the more stupid of the critics.

Lynne also notes that the Treasury has to issue a ton of new short-term money, $134 billion today, to jigger the books until the debt ceiling is raised. The current date for really running out of money is Feb 27. The Plubs say they don’t want to play chicken again, so where’s the clean bill?

This is going to be a shortish week, with plenty of US traders leaving early on Friday ahead of the holiday on Monday and Chinese activity also a bit subdued as the lunar new year holiday celebrations continue, not to mention the distraction of Sochi. We don’t see the catalyst for a big change in sentiment toward the dollar. In a way, acceptance of the payrolls report on Friday as “okay” means US economic conditions are making the world safe for risk (i.e., dollar-negative except against the yen).

Noteto Readers : Next Monday is a national holiday in the US and banks are closed (Presidents’ Birthdays). We will not publish any reports.